Sual Power Plant in Pangasinan, Philippines. (Photo: Wikimedia Commons)
Terminating coal plants in the Philippines five years before original retirement date could prevent the release of 290 million tons of carbon emissions, an amount nearly double the country’s emissions in 2022, as indicated a report from climate tech thinkthank TransitionZero.
The existing coal fleet is scheduled to retire by 2047 if the coal plants run to the end of their plant life, or by 2051 if retire only after their last power supply agreement expires.
Both scenarios fall short of the International Energy Agency’s recommendation, which suggests that developing countries should end all unabated coal generation by 2040 for keeping the world’s warming under 1.5 degrees Celsius by 2050.
Although Philippines’s fleet is relatively young, retiring coal plants five years early could lead to their decommissioning around 2040. As at 2022, the country’s power profile remains dominated by coal with an installed capacity of 12.2 GW from 58 coal units, covering 43.9% of the energy mix.
“Without early retirement, emissions from the power sector will remain high until late 2040s, given coal’s dominance in the electricity mix,” TransitionZero said.
However, the average abatement cost to purchase and replace coal plants remains high, at about US$140 per tCO2. This comprises US$41 to buyout power supply agreements and US$99 to replace the coal plants with solar and battery storage, according to the report. It also pointed out a wide range in buy-out costs, between US$19,200 and US$2.8 million per MW of capacity.
The high abatement costs means that most coal plant owners are gaining high profits, with long-term profitability averaging US$65 per MWh.
“The high marginal abatement cost stems from high profitability in power supply deals within the country’s tariff structures, which include fuel cost pass-throughs that see consumers bearing the cost of high fuel prices and not benefiting from savings when prices drop,” the report pointed out.
In addition, with the liberalization of the Philippines’ power market, renegotiating power supply agreements involves a complex process with multiple counterparties, each having varied durations.
There are also distribution utilities and electric cooperatives, mandated to represent consumer interest and responsible for securing affordable and reliable power for their captive market.
For certain distribution utilities or electric cooperatives which have only one power supply deal to serve full demand, or where alternative sources of generation are not readily available, negotiations may easily stall as interests can be hard to reconcile.
This underscores the difficulty of screening assets as each deal is unique, and plant owners must be proactive in identifying chances for early shutdown. However, this also implies that refinancing options need to be made available to plant owners.
TransitionZero added that the Philippines’ energy transition plan needs to incentivize early adopters and ensure that plant owners see early refinancing as an important strategy.
Coal plant owners need to be convinced that early retirement is a crucial business strategy. While coal plants are cash cows now, the changing political and business climate will exert immense pressure on continued coal operations as renewables begin to crowd out fossil fuels in the power sector.
Renewable energy is already changing the cost game. A Solar Philippines Tarlac Corporation power supply agreement was recently awarded at US$53 per MWh, less than half the average coal tariff of US$138 per MWh.
Approximately 2.9 GW of coal power supply deals, which is about 25% of the grid-connected capacity, are expected to expire before 2030.
“Despite current profitability, coal plants face the risk of becoming stranded assets due to shifts in regulatory, business and political climates, which are likely to exert increased pressure on coal operations. It’s essential to establish robust selection criteria to accurately determine transition schedules and guarantee that appropriate transition finance is made accessible,” said the report.